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2016 (2) TMI 825 - ITAT MUMBAIPenalty u/s 271(1)(c) - disallowance of loss on the date of conversion of stock-in-trade - Held that:- The loss on the date of conversion is supported by the market data available in the public domain, that is, as listed in the stock exchange. At the time of conversion of stock-in-trade, there was no recovery of bad debts up till 3.4.2006 (i.e. on the date of conversion), hence it cannot be inferred that the Assessee had intended to set off the future bad debts recovery from the loss on conversion and later on valuation of the stock at the year end. Another important factor which has been pointed out by the ld. Counsel at the time of the hearing is that, now in A.Y 2015-16 the value of the shares has shot up manifold and if the Assessee has to pay tax now on such shares (which is still being held by the Assessee), then the Assessee will have huge income tax liability of more than ₹ 22.72 lacs whereas, had it been held as investment, then, the entire income would have been exempt u/s 10(38). If we take into account the future event of A.Y 2015-16, when the value of the shares have shot up, then, it cannot be held that the Assessee has planned any colourable device deliberately only to set off the recovery of bad debts. The loss on account of valuation of stock as on 31.3.2007 is actually a book loss as per the market rate. Under these facts and surrounding circumstances the loss on conversion cannot be doubted as all these factors strongly point out that the loss of ₹ 1,83,75,418/- is genuine loss and no penalty can be levied on disallowance of such a loss. The Assessee’s explanation and the claim has not been rebutted by bringing any material on record except for rejecting the same on the basis of presumption and surmise that the loss has been shown purely to set off the recovery of bad debts. Thus, the penalty levied on such a disallowance cannot be upheld and same is directed to be deleted on merits. Another important thing which is to be noted here is that, in the quantum proceedings the AO has disallowed the loss on alternate ground also by invoking Explanation to Sec. 73, holding that it is a speculation loss. However, neither in the penalty order nor in the subsequent quantum order this issue has been decided. Therefore, the same cannot be held to be a ground for levy of penalty. Moreover, before us the ld. Counsel had pointed out that in A.Y 2008-09 the AO had disallowed a similar loss as speculative loss by invoking explanation to Sec. 73, however, no penalty proceedings have been initiated. Therefore, on these facts it cannot be held that penalty can be confirmed on this alternate ground taken by the AO. - Decided against revenue
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